MPs have chided the Department of Health for not having a "failure regime" for bankrupt hospitals after it emerged that two could be privatised and another will lose its accident and emergency department as a result of the first declaration that an NHS trust is insolvent.

The cross-party public accounts committee warned there was "a growing number of NHS trusts and NHS foundation trusts in financial difficulty, but it is not clear what will trigger them being placed in special administration, or exactly how the process will work, including the role of ministers".

Accusing the health department of "inventing rules on the hoof", the committee said 21 of the most troubled hospital trusts had received £1bn over the past five years to maintain services and pay wages.

Plans for South London NHS trust, declared bankrupt in July, were outlined on Monday by the special administrator, Matthew Kershaw. He said that without action the trust, already losing £1m a week, would accumulate a deficit of more than £240m by the end of 2015.

South London, with an annual spend of £440m, runs three hospitals – Queen Mary's in Sidcup, Princess Royal in Bromley and Queen Elizabeth in Woolwich – serving a population of 1 million and employing 6,000 people. The draft report recommends that Queen Elizabeth is merged with Lewisham Healthcare trust and that the accident and emergency department at Lewisham hospital be closed.

The review, drafted by Kershaw and which private consultants were paid £2m to work on, could see Princess Royal, built in 2003 using the private finance initiative with 525 beds, offered to a private company – although Kershaw said his "preferred option" was that it be taken over by King's College hospital.

Kershaw, a civil servant in the department of health, said: "King's are very keen to do so but we can get other benefits from the independent sector … and absolutely there's a choice in the report."

Queen Mary's would be taken over by Oxleas mental health foundation trust and land sold off to pay off debts. This would then become a "health campus" with the hospital service reduced to cope with only simple day cases – no longer offering hip or knee replacement surgery. The hospital service could then be put out to tender.

It is understood Circle, which became the first private company to run an NHS hospital earlier this year, Serco and Virgin have expressed interest in running parts of the South London, as have NHS organisations such as Guy's and St Thomas's.

Kershaw said: "The current design of services and the economy of the local health system are not safely tenable in the long term".

He said there were "no promises" on job losses. The deficit in South London will be £65m this year, with a third of this made up from PFI payments which the taxpayer will have to carry on paying. Another £34m, the report says, could be saved from medical and nursing pay. "The trust has the lowest income per consultant in its peer group, a very high ratio of junior doctors to consultant staff and high use of locum and agency staff," the report warns.

Andrew Gwynne, a shadow health minister, said Labour had "repeatedly warned David Cameron it was dangerous to reorganise the NHS when its first focus should have been on facing the financial challenge — this distraction is now throwing the NHS off course.

"With hospital trusts facing a financial challenge David Cameron's government should be focusing on sorting the situation out. Instead, as this report reveals, they lack a plan to deal with trusts in serious financial difficulties and cannot guarantee that the quality of patient care will not be affected."

The government denied it was "making the rules up" as it went along. Lord Howe, the health minister, said: "in fact, we are working closely with Monitor, the NHS Trust Development Authority (NTDA) and health professionals to set out proposals on how Foundation Trusts and other healthcare providers can remain financially stable and will report back on this later in the year."